Contingent Commission

Contingent Commission

Definition

A commission paid by an insurer or reinsurer to an insurance intermediary that is based on the profitability of the business that the intermediary placed with the insurer or reinsurer. In other words, these programs reward intermediaries for placing a large volume of business likely to suffer lower than average losses with the insurer (and maintaining that business). The purpose of contingent commissions is to provide an incentive to place a substantial book of business with the insurer or reinsurer and provide the insurer or reinsurer with "frontline" underwriting, administration, and risk control assistance for that book of business. As they may conflict with representing the best interests of policyholders, the practice of accepting contingent commissions by insurance brokers was attacked by the New York Attorney General in 2003–2005 and is no longer a common practice, at least with the larger firms. On the other hand, since they are the legal representatives of insurers, independent agents accepting contingent commissions is not viewed as unfavorably and is still commonly practiced. Contingent commissions are not considered illegal or, given proper disclosure, unethical.

Related Terms

Also called a market service agreement (MSA), this is an agreement between an
insurance intermediary and an insurer that includes a type of contingent
commission program based predominately on the volume of business placed with an
insurer with little or no relation to the profitability of the business placed
with the insurer. This type of payment is considered to present a greater
conflict of interest for the insurance intermediary in representing the
interests of the policyholder and was the type of agreement that the New York
attorney general focused on during his attack on contingent commission
practices in 2003–2005. This approach is viewed quite unfavorably by the risk
management and insurance community and is rarely if ever used today, at least
by the largest firms.

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